Since March 2022, mortgage rates in Canada have risen significantly, raising concerns for homeowners and potential buyers. But what drives these changes, and how do they impact your choice between fixed and variable mortgage rates? Let's simplify this important financial topic.
Mortgage rates fluctuate based on several key economic factors:
Variable-rate mortgages, often called adjustable-rate mortgages, are directly tied to the Bank of Canada's overnight rate. Here's how it works:
When the Bank of Canada increases its overnight rate, your mortgage payments also increase. Conversely, if the overnight rate decreases, your payments drop. Variable rates are advantageous during periods of falling interest rates but can become stressful if rates rise unexpectedly.
Variable-rate mortgages offer flexibility, as borrowers typically have the option to switch to a fixed-rate mortgage if they become concerned about rising interest rates. However, during economic uncertainty or instability, lenders might become cautious, limiting this flexibility.
Fixed mortgage rates operate differently from variable rates. They are primarily linked to Canadian government bond yields, specifically the 5-year bond rates:
However, even during downturns, banks may increase fixed mortgage rates if they perceive higher lending risks. This scenario can keep fixed rates elevated despite low bond yields.
Choosing between fixed and variable rates depends on personal financial circumstances, comfort with risk, and future plans:
Historically, during the COVID-19 pandemic, homeowners who locked in low fixed rates enjoyed stability as interest rates climbed afterward. Conversely, those with variable-rate mortgages faced increased financial stress from rising payments.
After COVID interest rates in Canada peaked around 5% in June 2024 but have since decreased significantly. As of March 12, 2025, the Bank of Canada's overnight rate has dropped to 2.75%. This reduction has provided relief for homeowners with variable mortgages and has improved affordability for potential homebuyers and those looking to refinance their mortgages.
The recent decrease in rates signals greater opportunities for Canadians to secure favorable mortgage terms and more manageable monthly payments.
Deciding between fixed and variable rates involves several crucial considerations:
Expert guidance can make this decision easier by clarifying how different mortgage types align with your personal financial situation and long-term goals.
Still Have Questions?
That's totally normal! Mortgages can feel complicated, but you don't have to navigate this alone. As your friendly Mortgage Broker, I'm here to answer all your questions, explain your options clearly, and help you find the best mortgage for your unique situation.
Reach out today—let's chat and get you on the path to your new home!
Kelly Hudson
Mortgage Expert
Mortgage Architects – A Better Way
Mobile: 604-312-5009
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